This paper presents an algorithm for compressing image data by separating the image into two parts. I.e. edge image containing high-frequency components and non-edge image containing low-frequency components of image. The edge image is extracted by using 8 level compass gradient masks and the non-edge image is obtained by removing the edge image from the original image. The edge image is coded by Huffman run-length code and the non edge image is transformed first by DCT and the transformed images is coded next by a quantized bit allocation table. For an example image. GIRL. the proposed algorithm shows bit rate of 0.52 bpp with PSNR of 36dB.